Paying Down College Debt

How friends and family can help whittle down a student loan

En español | Many college students face their most arduous test after graduation, when it's time to address student loan debt of tens, and sometimes hundreds, of thousands of dollars.

— Paul Hudson/fstop/Corbis

Fortunately, there are things that savvy friends and family members can do to help newly minted grads in an era where student loan debt has surpassed credit card debt for the first time, according to financial aid expert Mark Kantrowitz.

The smartest strategy is to focus on loans with the highest interest rates, not the largest outstanding balance, says Kantrowitz, publisher of financial aid websites Fastweb.com and Finaid.org.

Anyone helping a student whittle down an educational loan should "wait until after the student graduates, because you don't want to reduce eligibility for need-based financial aid," says Kantrowitz, who's heard of medical students owing as much as half a million dollars.

In August, a national study conducted by the student loan giant Sallie Mae and polling firm Gallup indicated that 14 percent of college costs are supported by student borrowing. The largest percentage of the expenses, 37 percent, comes from parent income and savings, with parent borrowing accounting for an additional 10 percent.

But friends and relatives, the study found, foot a full 7 percent of the bill (the rest comes from scholarships and the students' own income and savings).

People pitching in to retire student loan debt need to be mindful of an IRS gift threshold, Maryland CPA Gary Stacharowski cautions: "As long as they stay within the $13,000 per individual per year gift rule, taxes aren't a problem." If the gift is higher than that, the recipient may be liable for income taxes.

Volunteer-minded individuals can take advantage of programs such as the Edward M. Kennedy Serve America Act, which gives $1,000 educational awards to people 55 or older who perform at least 350 volunteer hours annually, Kantrowitz says. The award can be transferred to a child, foster child or grandchild.

Many people, however, may want a simpler method. To that end, some creative solutions have emerged in recent years.

Lily's List

Illinois mom Jennifer Taylor was shocked to discover that her daughter Lily, a sophomore at the University of Iowa, could face as much as $20,000 in student loan debt after graduation.

"When I showed her the numbers she could be responsible for, she was horrified" too, says Taylor, 54. Necessity again proved to be the mother of invention, and Lily's List was born.